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While most companies seeking venture capital
initially think about angel investors and venture
capitalists, a large alternative source of financing is
federal grants and loans. The two largest federal grant
programs are run by the Small Business Administration
(SBA), and by Small Business Investment Companies
(SBICs).
An SBA loan, regardless of whether it is a direct loan
from the SBA, or, as is more common, a bank loan
guaranteed by the SBA, is essentially a bank loan. The
benefit of it versus a traditional bank loan is the rate.
SBA rates are typically much less than traditional
business loan rates.
In most cases, in a guaranteed SBA bank loan, the SBA
guarantees 90 percent of the loan will be repaid to the
bank. As such, banks are at much less risk than in most
other loans, and are a bit more flexible with regards to
who they offer these loans. However, the SBA usually
requires the founders of the company to personally
guarantee the loans, which makes them risky should the
venture collapse.
Alternatively, Small Business Investment Companies
(SBICs) are privately organized corporations that are
licensed and regulated by the SBA. Small or emerging
businesses which qualify for assistance from the SBIC
program can receive equity capital and/or long-term loans
from these companies. Essentially, these companies
provide their own capital, which is supplemented by
federal funds, to the companies they fund.
Interestingly, U.S. taxpayers benefit from the SBIC
program as tax revenues generated from successful SBIC
investments have more than covered the cost of the
program. Likewise the program has created hundreds of
thousands of jobs.
In summary, SBA and SBIC financing are viable
alternatives to financing from angel investors and
venture capitalists and should be considered in the
capital raising process. Similarly to angel and VC
financing, companies seeking SBA and SBIC financing need
a strong management team and value proposition, and a
highly professional and compelling business plan in order
to raise the capital they need.
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